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Politics & MoneyIPO / M&A

Printing More Money as a Capital Illusion

“And I promise to every Floridian that you will all be RICH!! Because we’re gonna print some more money! Why didn’t anybody ever think of this before??!!” — Nathan Explosion, Metalocalypse In this episode for the Adult Swim animated series, the front man of Dethklok — an unrealistically high-earning metal band described as the “world’s seventh largest economy” — feels as newly-elected governor of Florida that his quantitative easing approach to a slumping economy will deliver huge results. This is followed quickly in the next shot with the newspaper headline: New Florida Currency Worthless. And for the rest of the episode, things begin to get really bad. Now, I’m playing devil’s advocate here, as quantitative easing is not exactly the same as printing money, as the Bank of England explains in its pamphlet, and it doesn’t really create money, either, so much as momentum: But it is meant to spark the economy, and here in the United States, several reports in the press point to the dollar as unable, from a logistics perspective, to perform this task alone. The most common report is that Chinese investors simply can not find anymore dollars to buy. Another is the call for another currency for use in trading. But yet it becomes harder to make this point when the dollar is suddenly surging this week on the back of Euro-strains (Greece is struggling to rescue itself and dragging the currency) and stronger Pound movement (Kraft is buying Cadbury’s for a reported $20bn). And of course, where the Dollar goes, the Yen follows. And this is a remarkable testament to the currency as Japan Airlines (JAL) just went bankrupt, and miraculously, the corporate bond world suddenly seems hedged. According to Fitch commentary on the subject, both high-yields and CDOs seem secure: “Exposure to JAL in these transactions is limited due to a combination of JAL’s speculative credit grade and minimal exposure to high yield corporate credits from the Asia-Pacific region within Fitch-rated synthetic CDOs.” Printing more money in the wake of such speculation would be foolhardy, though smarter minds than my own have suggested that a more aggressive monetary policy could have prevented the Great Depression. Therefore, this suggestion of a new financials-linked currency remains an unsettled solution, which Paul Krugman also acknowledges. While I applaud Krugman for introducing the Optimal Currency Theory and such, I’m not sure a viable alternative doesn’t already exist. In fact, I’m pretty sure continued efforts to back stop the Asset-Backed Commercial Paper market — which are ending as the Fed winds down its rescues in the commercial paper market (Google AMLF and CPFF, and see what you get) — require a complete rethink. These facilities, as evidenced below, did little to return vibrancy to the market. For those who can’t be bothered, commercial paper is an IOU from a bank that is normally collateralized by trade receivables. In terms of short term financing, it’s a pretty tight ship, though it is not without its risks (the dollar remains backed by the US, after all). Consider this graph from Credit Suisse (click for a larger version): ABCP was once a $1.2trn market. Imagine $1.2trn in liquidity flowing between banks. That’s some serious short term liquidity power, and it works in other markets as well. Strangely enough, in going through some of my past files, I found the below chart from Moody’s Investors Service, dated February 2007, which shows the European ABCP market at $227bn (click for a larger version). Of course banks stopped lending to one another, and the Structured Investment Vehicles, the heavy investors in short-term paper who mismatch assets and liabilities with long term debt, are now out of the space altogether. As bank-to-bank credit dried up, so followed consumer credit. But what’s important here is that the ABCP market was able to wind down in an orderly fashion. Yet it remains on the cusp, with some real speed bumps in the way. By the end of last week, the Credit Suisse ABCP trading desk said: “Flows seemed to slow down; however, the top programs seemed to benefit from seemingly endless demand, with investors even buying for spot settlement (two days forward) to lock in product. On Friday, the market was faced with a triple whammy of technicals (Treasuries settled, Corporate Tax day, and the beginning of the three day Holiday weekend) which made for a slow day.” ABCP is a hardened market. It’s been tried and tested. And it’s capable of winning, though currently demand completely outweighs supply. Nonetheless, I have to ask, why spend time starting something new when something else will already work just fine?

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